Reinvigorating the Nordic Welfare Model as a way out of the Crisis

Among the Nordic countries, Iceland clearly experienced the most dramatic crisis problems after 2008. This followed a decade of excessive liberalisation of monetary and credit policy where credits and foreign debt were built up to an extremely vulnerable level that jeopardized the entire economy. And the Icelandic economy really did collapse like a house of cards. The recovery part of the story is the most interesting, however. Iceland experienced a decline in GDP around 10 per cent. However, by reinvigorating the Nordic welfare model and by conducting a carefully dosed Keynesian policies, Iceland managed to recover surprisingly fast. By the end of 2012, the cumulative decline in GDP (2007-2012) was smaller than in Denmark, and the cumulative growth 2000-2012 remained among the best in Europe. From enormous current account deficits occasionally approaching 20 per cent of GDP in the years before the collapse, a balance was nearly established in 2012. State debt remained below 60 per cent of GDP, and state deficits had reached a tolerable level by 2012. The Icelandic people experienced a very considerable decline in living standards, but the state was able to alleviate the worst problems, and unemployment remained slightly below the Eurozone average. From 2011 the economy was clearly heading upwards. In short, the recovery was much less painful than in Ireland and in the economies that collapsed in Southern Europe.